Does Fox-Wizel (TLV:FOX) Have A Healthy Balance Sheet?

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. We note that Fox-Wizel Ltd. (TLV:FOX) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

What Risk Does Debt Bring?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for Fox-Wizel

What Is Fox-Wizel's Net Debt?

As you can see below, at the end of September 2022, Fox-Wizel had ₪890.6m of debt, up from ₪627.2m a year ago. Click the image for more detail. However, its balance sheet shows it holds ₪1.40b in cash, so it actually has ₪511.0m net cash.

How Healthy Is Fox-Wizel's Balance Sheet?

The latest balance sheet data shows that Fox-Wizel had liabilities of ₪1.89b due within a year, and liabilities of ₪2.61b falling due after that. Offsetting this, it had ₪1.40b in cash and ₪721.1m in receivables that were due within 12 months. So its liabilities total ₪2.38b more than the combination of its cash and short-term receivables.

Fox-Wizel has a market capitalization of ₪4.22b, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. However, it is still worthwhile taking a close look at its ability to pay off debt. Despite its noteworthy liabilities, Fox-Wizel boasts net cash, so it's fair to say it does not have a heavy debt load!

Fox-Wizel's EBIT was pretty flat over the last year, but that shouldn't be an issue given the it doesn't have a lot of debt. There's no doubt that we learn most about debt from the balance sheet. But it is Fox-Wizel's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. Fox-Wizel may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. Happily for any shareholders, Fox-Wizel actually produced more free cash flow than EBIT over the last three years. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.

Summing Up

Although Fox-Wizel's balance sheet isn't particularly strong, due to the total liabilities, it is clearly positive to see that it has net cash of ₪511.0m. The cherry on top was that in converted 118% of that EBIT to free cash flow, bringing in ₪346m. So we don't have any problem with Fox-Wizel's use of debt. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. Case in point: We've spotted 2 warning signs for Fox-Wizel you should be aware of.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.